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  • Rev Shark:

    Debunking the Big Bounce Theory
    4/18/05 9:00 AM ET

    "A person in danger should not try to escape at one stroke. He should first calmly hold his own, then be satisfied with small gains, which will come by creative adaptations."

    I Ching

    Although the market has already fallen quite sharply recently, the danger of further downside remains very high. The more that market participants anticipate a big reversal, the less likely one is to occur, and that is the major problem facing this market as we kick off a new week.

    There is a very strong temptation to view this market as "oversold" and ready for a big bounce. After all, we had three big negative days in a row, the mood is sour and we are actually seeing signs of some fear. It is when emotions are extreme that we tend to bounce, and this looks like a pretty darn good setup right now for a recovery. Oil is down, we have the hope of some good earnings reports, and if the Fed has a few encouraging words, the chances of a good upside move look good.

    The big problem is that when too many folks expect a bounce, the selling pressure that can result if it fails can increase tremendously. Think about the psychology at work for traders who come into the day looking for a bounce. They put capital to work as the market starts to show some signs of recovery, but then the bounce starts to stall and the indices aren't moving. Do those traders stay patient and rely on "oversold" arguments to give them comfort?

    No, they sell first and ask questions later, and the more traders there are trying to catch a bounce, the more downside pressure if it fails.

    I spent some time this weekend looking at the chart of the 1987 crash. The setup is very similar to what we have today, and in fact, the market was even more oversold in 1987 when we crashed than we are today. In 1987, just like now, we had three big down days in a row on Wednesday through Friday that took the S&P 500 under its 200-day moving average.

    On Monday, in 1987 the market opened flat but was unable to gain any traction. As the day progressed and it became clear that a bounce was just a dream, the selling overwhelmed the market.

    There are a lot of reasons why a similar crash won't occur today, but it is a extremely good illustration of the fact that oversold markets can become substantially more oversold if the buyers have no ability to follow through.

    We have a little bit of a bounce shaping up this morning but you have to be skeptical of Monday morning strength after an ugly week. The real test of this market will come when we see a pullback after the open. Do buyers scare out easily? Are there any dip-buyers to be found?

    Don't get overanxious to jump into this market. If you have a short time frame, then go ahead and try to play the intraday volatility. But if you are a longer-term investor, this is not the time to put your capital to work. This market has a lot of work to do before we can trust it with our precious cash.

    Overseas markets were hit hard in sympathy with our struggles on Friday. Tension between China and Japan is impacting Asian markets. Oil is down again, the dollar is weak and gold is up.

    Gary B. Smith:

  • Kõrvallaud räägib tänasest rallist, mina aga hästi ei usu seda. Vt kasvõi INSP, kogu päevaalguse pluss on käest antud.
  • Tine indikatsioon veel, mis mind negatiivseks teeb: ADBE on MACR ülevõtmise peale kaotanud $1.5 mld turuväärtusest, preemiat maksavad ainult $1 mld .. kusjuures, tegemist on minu arvates väga mõistliku ja loogilise kombinatsiooniga.
  • Ralli jääb vist täna ära jah. Siiani küll selline ühe koha peal siplemine mis ei välista kuidagi edasist allakäiku.
  • well, hommikul olid futuurid üle 0,5% miinuses....
  • Texas instruments (TXN) pealtnäha heade tulemustega.
    EPS estimate: $0.23, tegelik: $0.24.
    Revenue estimate: $2.99B, tegelik: $2.97B
    Järelturul hetkel plussis $1.17 (5.10%).

    Vähemalt ei alanud nädal suurte punastega :)

    Kas chipside rasked ajad möödas?

    diskleimer: short@TXN

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